Tempur Sealy(TPX) - 2021 Q4 - Annual Report

Part I Business Overview Tempur Sealy is a global leader in bedding products, leveraging recognized brands and an omni-channel strategy across North America and International segments - The company's core business is designing, manufacturing, distributing, and retailing bedding products in over 100 countries[18] - Key brands include Tempur-Pedic®, Sealy®, and Stearns & Foster®, supplemented by private label and OEM products[19] - The business is structured into two geographical segments: North America (U.S., Canada, Mexico) and International (Europe, Asia-Pacific, other Latin America)[23] - Recent strategic acquisitions include Dreams Topco Limited in August 2021 and an 80% interest in Sherwood Bedding in January 2020[23][24] Products, Brands, and 2022 Launches The company's product portfolio includes highly recognized brands such as Tempur-Pedic, Stearns & Foster, and Sealy, with new product launches planned for 2022 - The company's product portfolio includes highly recognized brands such as Tempur-Pedic (specialty innovation), Stearns & Foster (high-end innerspring), and Sealy (trusted value and durability)[28][29] - In 2022, the company plans several new product launches, including a refresh of the North American Sealy and Stearns & Foster® portfolios, an eco-friendly Sealy-branded mattress collection in the U.S., and a new line of Tempur® products in Europe and Asia-Pacific to broaden the brand's price range[31][32][33] Omni-Channel Distribution The company employs a dual-channel distribution model, combining wholesale with a growing direct channel including over 650 retail stores worldwide - The company utilizes a dual-channel distribution model: Wholesale (third-party retailers) and Direct (company-owned stores, e-commerce, call centers)[34] - The Direct channel represented 18.2% of net sales in 2021 and is expected to continue growing as a percentage of total sales[36] - The company operates over 650 retail stores worldwide, including 88 Tempur-Pedic stores in the U.S. and over 200 Dreams stores in the U.K. acquired in 2021[37][38][40] Operations The company operates four R&D centers and faced supply chain constraints and increased production costs in 2021 due to demand surge - The company operates four research and development centers (three in the U.S., one in Denmark) focused on technology and product development[50] - Key raw materials include polyethylene foam, textiles, and steel innerspring components, with the company facing supply chain constraints and increased production costs in 2021 due to a rapid increase in demand[48][49] Intellectual Property The company holds numerous valuable U.S. and foreign patents and trademarks, generating significant royalty income from licensing activities - The company holds numerous U.S. and foreign patents and trademarks, which it considers to have significant value, including key registered trademarks like Tempur®, Tempur-Pedic®, and Dreams®[54][55] - Licensing activities for the Sealy®, Stearns & Foster®, and Tempur® brands generated approximately $29.1 million in royalty income for the year ended December 31, 2021[56] Environmental, Social, and Corporate Governance (ESG) The company is committed to ambitious ESG targets, including carbon neutrality by 2040 and zero landfill waste from U.S. manufacturing by 2022 - The company is targeting carbon neutrality by 2040 and zero landfill waste from U.S. manufacturing by the end of 2022[63] - In 2021, ESG was embedded as a metric in executive leadership's compensation, and female representation on the Board of Directors increased by 50% to 33%[63] - As of December 31, 2021, the company had approximately 12,000 full-time employees globally[91] Risk Factors The company faces risks from macroeconomic uncertainties, intense competition, supply chain disruptions, operational challenges, and significant financial and legal matters - Business & Economic Risks: The company faces risks from the ongoing COVID-19 pandemic, a highly competitive industry, potential loss of suppliers, and inflationary trends in raw material prices[70][73][75][79] - Operational Risks: The business depends on successful new product launches, relationships with significant customers (top five accounted for 33% of 2021 net sales), and the stability of its IT infrastructure, with a new ERP system implementation ongoing[83][84][85][89] - Financial & Legal Risks: A key risk is an unresolved tax matter with the Danish Tax Authority (SKAT) regarding royalty payments, currently in the Advance Pricing Agreement Program, alongside foreign exchange fluctuations, debt leverage, and the transition away from LIBOR[99][100][103][104] - Stock Ownership Risks: The company notes that future dividend payments are not guaranteed and that its share repurchase program could be suspended or terminated, which may not enhance long-term stockholder value[118][119] Properties The company operates principal manufacturing facilities across North America and International segments, deemed suitable and adequate for current and future needs Principal Manufacturing Facilities by Segment | Segment | Location | Type of Facility | | :--- | :--- | :--- | | North America | | | | Sealy Mattress Manufacturing Co., LLC | United States | Manufacturing | | Tempur Production USA, LLC | United States | Manufacturing | | Sherwood Bedding | United States | Manufacturing | | Comfort Revolution, LLC | United States | Manufacturing | | Sealy Canada, Ltd | Canada | Manufacturing | | Sealy Mattress Company Mexico, S. de R.L. de C.V. | Mexico | Manufacturing | | International | | | | Dan-Foam ApS | Denmark | Manufacturing | | Dreams | UK | Manufacturing | Part II Market for Common Equity and Related Matters Tempur Sealy's common stock trades on the NYSE, with the company initiating quarterly dividends and executing significant share repurchases in 2021 - The company's common stock trades on the New York Stock Exchange under the symbol 'TPX'[133] - In February 2022, the Board of Directors declared a quarterly cash dividend of $0.10 per share[135] 2021 Share Repurchase Summary | Metric | Value | | :--- | :--- | | Shares Repurchased | 19.5 million | | Total Cost | ~$801.4 million | | Remaining Authorization (as of Dec 31, 2021) | ~$1,400.7 million | Share Repurchases (Q4 2021) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased Under Program | | :--- | :--- | :--- | :--- | | Oct 2021 | 445,674 | $45.97 | 441,892 | | Nov 2021 | 1,481,317 | $43.54 | 1,474,105 | | Dec 2021 | 3,620,712 | $45.71 | 3,620,712 | Management's Discussion and Analysis (MD&A) In 2021, Tempur Sealy achieved significant sales and net income growth, driven by strong demand and acquisitions, while managing costs and strengthening its balance sheet Results of Operations (2021 vs. 2020) The company reported substantial net sales and operating income growth in 2021, despite a slight decline in gross margin due to commodity costs and acquisitions Key Financial Results (2021 vs. 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $4,930.8 million | $3,676.9 million | +34.1% | | Gross Margin | 43.8% | 44.6% | -80 bps | | Operating Income | $912.3 million | $532.1 million | +71.5% | | Net Income | $624.5 million | $348.8 million | +79.0% | | Diluted EPS | $3.06 | $1.64 | +86.6% | - Net Sales: Increased 34.1% to $4.93 billion. North America sales grew 29.1% driven by broad-based demand, while International sales grew 64.5% (60.1% constant currency), largely due to the acquisition of Dreams[166][171] - Gross Margin: Declined 80 basis points to 43.8%. North America margin fell 110 bps due to price increases offsetting commodity costs without a margin benefit, and International margin fell 280 bps, primarily due to the lower-margin Dreams business (210 bps impact)[168][172] - Operating Income: Increased to $912.3 million, with operating margin improving 400 basis points to 18.5%, driven by strong sales leverage and lower corporate expenses compared to 2020, which included high stock-based compensation charges[180] Liquidity and Capital Resources Cash flow from operations increased in 2021, while investing activities surged due to the Dreams acquisition, leading to higher debt but strong liquidity Cash Flow Summary (2021 vs. 2020) | (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Cash from Operating Activities | $723.1 | $654.7 | | Cash used in Investing Activities | ($554.8) | ($146.6) | | Cash from (used in) Financing Activities | $76.5 | ($522.6) | - Cash used in investing activities increased significantly due to the $476.7 million acquisition of Dreams[194][162] - Total debt increased to $2.35 billion at year-end 2021 from $1.37 billion in 2020, with the ratio of consolidated indebtedness less netted cash to adjusted EBITDA at 1.81 times, well within the 5.00 times covenant limit[198][203] - The company had $1.2 billion of liquidity as of December 31, 2021, including $300.7 million in cash and $724.3 million available under its revolving credit facility[209] - Capital expenditures for 2022 are expected to be approximately $250 million to $280 million[197] Non-GAAP Financial Information This section provides reconciliations of non-GAAP financial measures, including Adjusted EBITDA and consolidated indebtedness less netted cash Reconciliation of Net Income to Adjusted EBITDA (2021) | (in millions) | Amount | | :--- | :--- | | Net income | $624.5 | | Interest expense, net | $61.1 | | Overlapping interest expense | $5.2 | | Loss on extinguishment of debt | $23.0 | | Income tax provision | $198.3 | | Depreciation and amortization | $176.6 | | EBITDA | $1,088.7 | | Loss from discontinued operations, net of tax | $0.7 | | Acquisition-related costs | $6.2 | | Earnings from Dreams/Sherwood prior to acquisition | $40.3 | | Adjusted EBITDA | $1,135.9 | Reconciliation of Total Debt to Consolidated Indebtedness Less Netted Cash (as of Dec 31, 2021) | (in millions) | Amount | | :--- | :--- | | Total debt, net | $2,331.5 | | Plus: Deferred financing costs | $21.7 | | Consolidated indebtedness | $2,353.2 | | Less: Netted cash | $299.5 | | Consolidated indebtedness less netted cash | $2,053.7 | Critical Accounting Estimates Key accounting estimates involve revenue recognition, income taxes (especially the Danish Tax Matter), goodwill, and business combinations, requiring significant judgment - Key critical accounting estimates include revenue recognition (including sales returns and credit losses), income taxes, goodwill and indefinite-lived intangible assets, and business combinations[241] - Income Taxes: A significant estimate relates to the Danish Tax Matter, where the company is in the APA Program for tax years 2012-2022 to resolve the royalty rate paid by its U.S. subsidiary to its Danish subsidiary, maintaining an uncertain tax liability for this matter[253][254] - Goodwill: The company performed its annual impairment test qualitatively in 2021 and concluded that the fair values of its reporting units (North America, International, and Dreams) were substantially in excess of their carrying values[257][261] Financial Statements and Supplementary Data The audited consolidated financial statements present the company's financial position and performance, with a critical audit matter identified for the Danish Tax Matter - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the financial statements and internal control over financial reporting, with the audit of internal controls excluding the recently acquired Dreams[271][443][444] - A Critical Audit Matter was identified related to the measurement of the liability for the Danish Tax Matter uncertain tax position, due to the significant judgment involved[275][278] Consolidated Statements of Income The consolidated statements of income highlight the company's financial performance, showing significant growth in net sales and net income from 2019 to 2021 Income Statement Highlights (2019-2021) | (in millions) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net sales | $4,930.8 | $3,676.9 | $3,106.0 | | Gross profit | $2,158.7 | $1,638.4 | $1,342.2 | | Operating income | $912.3 | $532.1 | $346.7 | | Net income attributable to Tempur Sealy | $624.5 | $348.8 | $189.5 | Consolidated Balance Sheets The consolidated balance sheets reflect the company's financial position, showing increased assets and liabilities primarily due to the Dreams acquisition Balance Sheet Highlights (as of Dec 31) | (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total Current Assets | $1,275.6 | $968.4 | | Goodwill | $1,107.4 | $766.3 | | Total Assets | $4,323.4 | $3,308.6 | | Total Current Liabilities | $1,053.4 | $974.8 | | Long-term debt, net | $2,278.5 | $1,323.0 | | Total Liabilities | $4,028.4 | $2,795.1 | | Total Stockholders' Equity | $285.8 | $504.6 | Consolidated Statements of Cash Flows The consolidated statements of cash flows detail the company's cash generation and usage across operating, investing, and financing activities Cash Flow Highlights (2019-2021) | (in millions) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $723.1 | $654.7 | $314.8 | | Net cash used in investing activities | ($554.8) | ($146.6) | ($90.2) | | Net cash from (used in) financing activities | $76.5 | ($522.6) | ($203.2) | | Increase in cash and cash equivalents | $235.7 | $0.1 | $19.1 | Note 3: Acquisitions and Divestitures This note details the August 2021 acquisition of Dreams Topco Limited for $476.7 million, resulting in significant goodwill and intangible assets - On August 2, 2021, the company acquired Dreams Topco Limited for a cash purchase price of $476.7 million, including $49.5 million of cash acquired, resulting in $357.1 million of goodwill and a $141.9 million indefinite-lived intangible asset (trade name)[335][337][338] Note 6: Debt This note outlines the company's debt structure, including 2021 bond issuances and redemptions, with total debt at $2.35 billion and covenant compliance - In 2021, the company issued $800.0 million of 3.875% Senior Notes due 2031 and $800.0 million of 4.00% Senior Notes due 2029[360][363] - The company redeemed its $600.0 million 2026 Senior Notes and the remaining $250.0 million of its 2023 Senior Notes in 2021, resulting in a total loss on extinguishment of debt of $23.0 million[366][367] - As of December 31, 2021, total debt was $2.35 billion, and the company was in compliance with all debt covenants[346][355] Note 13: Income Taxes This note discusses the company's income tax position, including the effective tax rate and the ongoing Advance Pricing Agreement procedure for the Danish Tax Matter - The effective tax rate for 2021 was 24.1%, compared to 22.7% in 2020[404] - The Danish Tax Matter for tax years 2001-2011 is considered closed, while for tax years 2012-2021, the company is in an Advance Pricing Agreement (APA) procedure with the IRS and Danish Tax Authority (SKAT)[417][418] - As of December 31, 2021, the company maintained an uncertain income tax liability of $50.1 million for the Danish Tax Matter for the 2012-2021 period[419] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, excluding the Dreams acquisition - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[435] - Management's assessment of internal control over financial reporting concluded that controls were effective as of December 31, 2021, with this evaluation excluding the internal controls of Dreams, which was acquired in 2021[438] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified report on the company's internal control over financial reporting as of December 31, 2021[439][443]